Stops - do you want them?

[kidPWRtrader]

I can plainly state why I use stops.

I learned to extract $ from the market using S/R and patterns. I know when S/R is invalidated, and patterns are invalidated, my % of winning goes down.

When I got a consistent stop amount for my setups I realized, all I had to do was know my accuracy for those setups and then I could slide my r/r up and down until the math worked.

Having no stops (if by no stops you mean not even an uncle, emergency stop point) you are letting one trade decide your fate. There are trades everyday, why risk it all on one?

 

[jazzguysoca]

In my experience, hard stops have always degraded performance, but of course YMMV.

Try backtesting a system that uses stops and take a look at your trade histogram. What you'll generally see is a bell curve (well, almost) that has its left tail cut off.

So you've definitely clamped your per trade loss, but unfortunately there's no free lunch - you've paid for that advantage by turning some of your profitable trades (those that would have dipped below your stop then took off for a gain) into loosers. And some of those trades will be outlier winners that you've missed.

So in most (not all) cases, adding stops will reduce win rate, as well as your max loss per trade.

To try and prove this assertion to myself, I ran some tests on synthetic markets and at least in the limited scope of those tests, they seemed to indicate that stops (and targets) reduce expectation (I've posted the results in my thread on this same forum). The tests seemed to indicate that the humble time stop is the clear winner.

My current system doesn't use stops (and yes, I survived the flash crash, was 100% long at the time and ended the day flat, with no outlier loss)

I'd never suggest that you shouldn't at least try stops in your backtesting, but make sure you also run tests without them, watching what happens not only to your expectation, but your drawdown as well.

Just my $0.02...

 

[dloyer]

My backtests and live trading had the same results.

The flash crash is a good example of how even long term investors can get hurt badly using stops.

I have a good friend that lost a large, long term position in AAPL to a stop during the flash crash. He is still bitter about it.

 

[lurefo]

Quote from ttowntrader:

Professionals should never use stops,

I think you should think twice before making such statements.

And if you want insurance, there is options, using stops just causes you to lose money. [/B]

Buying insurance causes you to lose money too.

So.... do you have any numbers to back up that statement? otherwise it is just another opinion. Not a fact.

 

[candletrader]

So much depends on what kind of a trader you are.

For example, a zero tolerance trader will remove or reduce his position if he is not proven correct immediately i.e. he has no use for stops. Given that this kind of trader is inevitably trading with orderflow and not against it, the zero tolerance approach is logical.

But I would say that the growth of HFTs is reducing the efficacy of such an approach.

 

[Redneck]

Do I want them – no I hate losing

Do I need them for my very survival – yes – consequentially I love em



Every successful trader uses them willingly


Every failed trader uses them eventually


To think otherwise is – well I’ll let you fill in the blank


So pick your poision carefully - but you will pick it - that I can promise




Btw some traders even use stops to enter a trade – food for thought


RN

 

[lurefo]

Ok I see the folks that advocate not using stops are mostly saying they're using size management, bigger margins, basically less leverage. Here is why I think this is inferior (B1S2 that one is for you) to trading with stops :

1) Some of the guys that use little leverage or no leverage at all and have survived the flash crash on the long side seem to use that as an argument to justify having no stop. Well if studying the history of the markets has taught us one thing it is definitely that basing one's risk strategy on past price movements/volatility is a mistake. Strangely, the markets like to suprise us with price movements, jumps in volatility and behaviors that were never experienced before. So ... next time the S&P goes limit down and re-opens at 500. Little leverage guy with no stop with 1ES car per every 25K survived the 100 pts flash crash drop thinking the worse is over. Well this time, different story: our man is wiped out.

2) If a 25, 50% or more drop in the market against your position doesn't scare you then in my opinion you are way underleveraged, or you're facing volume constraints in a thin market... If we ignore the later option, that's not trading at its best, that's more investing. Wich is fine btw, I'm not saying that one is better than the other, but that is just not good trading to me. As traders I think we must maximize returns by making good use of the available leverage within the limits of our strategy's drawdowns and you can't sanely use aggressive leverage if you have no stop. In that sense, that seems inferior to me.

3) There are different ways to skin the cat but for many traders, trades are invalidated once a condition is met (price area is touched/broken or a certain indicator crosses XYZ, etc). The logic wants to get out or as others suggest to hedge (options, other instrument, etc...). In any case it seems to me that having no stop does not fit at all with this type of trading.

 

[ScoobyStoo]

Quote from The Big D:

2) the exchange in question exposes the "dark" side of the order book to some traders either for a fee or as part of special market making privileges.

I know the NYSE specialists (or whatever they are called these days) used to run both the limit and stop order books for their symbols. Is that still the case? My knowledge of market structure on the stock exchanges is limited.

Personally I just trade on Globex which doesn't expose stop orders to anyone.

 

[rossky]

The very first question my mother asked me when saw me day trading: "They are watching you, aren't they?"

Would somebody please elaborate on what our own brokers can and cannot do in terms of running stops, please? Thank you.

 

[outsource]

Quote from lurefo:

Anyone remembers what happened on May 6 this year?

There is your answer.

It was made intentionally to put people back placing the SL again.